1. Moving the markets

A solid early bounce in the major indexes hit the skids, found upward impetus for a second time but then lost momentum with all three major indexes doing their best imitation of a swan dive by closing at the lows of the day.

It turned into another disappointing day for the dip buyers, as the midday pullback proved to have not enough support to justify taking new positions therefore handing the bears their second win in a row.

With today’s loss, the Nasdaq has now slipped into correction territory, which means a drop of 10% from its record high scored in November. As I posted yesterday, I ended up liquidating one or our positions, which had lately produced nothing but aimless meandering with a bent towards bearishness.

MarketWatch accurately described the current state of the market this way:

Nasdaq’s pullback from its November high has been led by growth stocks whose valuations ballooned during the pandemic. Shares of Peloton are off more than 80% from their highs. Zoom Video has shed more than 70%. Moderna, DocuSign and PayPal are all down more than 40% from their highs.

This is not surprising, as higher bond yields and generally tighter financial conditions always lead to weakness in those sectors which have superbly benefited by the Fed’s largesse over the past decade. So, it came as no surprise that “value” outperformed “growth.”  

Bond yields ended the session slightly lower but not before the 10-year touched the 1.90% level, which turned out to be the reversal moment for equities, and down we went. SmallCaps were hit hard and suffered a Death Cross (50-day M/A below 200-day M/A).

The US Dollar bounced off its YTD unchanged line and closed lower. The shining star of the day was gold, which added +1.6% and reclaimed its $1,840 level.

1. Moving the markets

As we’ve witnessed for most of this year, surging bond yields have been the culprit to not only keep equities in check but also pull them off their lofty levels. Such was the case again today when the session got off to a bad start with the Dow dumping some 500 points right after the opening. The markets are having their worst start to a year since 2016, as ZH pointed out.

Adding to the sour mood was Goldman Sachs’ disappointing earnings report due in part to a 23% surge in operating expenses, which spanked their shares at the tune of -7%.

In bond land, the closely watched 2-year yield pierced the 1% level for the first time in almost 2 years. It has proven to be a reliable measure as to where the Fed will set short-term borrowing rates. Not to be left behind, the 10-year followed suit by touching its 1.86% level, also its highest since January 2020.

What that means is that the bond market is pricing in the announced aggressive policy tightening by the Fed, as well as their hawkish guidance. So far, they have not done anything other than spook the markets, and it remains to be seen whether they will follow through or simply leave traders and computer algos to deal with nothing but anticipation.

In terms of earning season, MarketWatch summed it up like this:

Overall, 33 S&P 500 companies have reported calendar fourth-quarter earnings thus far, according to Refinitiv. Of those companies, nearly 70% posted bottom-line results that beat analyst expectations.

The US Dollar extended recent gains but pulled back into the close, while gold chopped around and only ended slightly lower.

While our TTIs (section 3) remain on the bullish side of their respective trend lines, one of our holdings has broken clearly through its trailing sell stop and will be sold, unless a rebound materializes tomorrow.

There was no place to hide during today’s drop, and it looks like further bond yield spikes could deflate this equity bubble even more and eventually send us to the safety of the sidelines.

1. Moving the markets

An early pump ran into strong resistance with the major indexes suddenly reversing and even breaking their respective unchanged lines to the downside. Fortunately, dip buyers stepped in and saved the markets from closing in the red.

The much-anticipated Consumer Price Index (CPI) showed an amazing 7% YoY ramp, which was in line with expectations, despite it being the biggest jump since 1982. It also has the dubious distinction of representing its 19^th straight monthly rise.

ZeroHedge drilled down a little further and reported that the Services inflation rose to 3.7%, it’s highest since January 2007, while Goods inflation soared 10.7% YoY, its highest since 1975. All this in the face of real hourly earnings falling (down 2.4% YoY) for the 9^th straight month. Ouch!

Given the above, it came as a surprise to see bond yields slide a tad, as an opposite reaction would have been a more appropriate move, especially after the Fed’s main mouth piece went into hawkish mode:

• Fed’s Bullard: Four Rate Rises in 2022 Now Appear Likely –WSJ
• Bullard: 2021 Liquidity Can Be Removed With Likely Little Disruption –WSJ
• Bullard: Early Start to Rate Hikes May Avoid More Hawkish Rate Path –WSJ
• Bullard: March Rate Rise Is Very Likely Amid High Inflation –WSJ

The weakness in bond yields was followed by a dump in the US Dollar, both of which combined forces to keep the gold rally alive.  

Earnings season is on deck and will start tomorrow with the big banks releasing their report cards. I’ll be back on Friday with the week-ending commentary.